If you want to buy a house, saving for a down payment is one of the most important steps. It’s not an easy task, but it can help you avoid costly mistakes and get you on the road to homeownership faster.
According to New England Federal Credit Union, down payments can also help lower your overall mortgage costs because you only pay interest on the money you actually borrow. This can save you thousands of dollars over the life of your loan.
What is a down payment?
A down payment is a portion of the purchase price of a home that a buyer pays in cash to secure a mortgage loan. When the purchase is completed, this amount will be amortized into a mortgage loan that the buyer must pay off in full.
The down payment amount is important because it shows lenders that you are a financially responsible borrower, and it can help lower the cost of your mortgage. This can affect the interest rate you receive, the size of your loan payments, the length of your loan, and what types of loans you qualify for.
In addition, a larger down payment can save you thousands of dollars in interest expenses. You’ll also be able to avoid paying private mortgage insurance (PMI) on the mortgage, which costs hundreds each month.
Putting down 20% of the purchase price is the most common percentage, but many lenders and programs accept a higher down payment. Whether you’re buying a $300k house or a $100,000 home, you should take the time to calculate your savings and find ways to make a down payment.
Once you have an idea of how much you can save, use a down payment calculator to find out how much you need to put away each month to reach your goal. Savings can be placed in interest-bearing accounts, such as savings accounts or CDs, or in investments, such as stocks and bonds.
If you have an emergency fund set aside, this can help cover unexpected expenses such as closing fees, inspections, appraisals, and other fees that are associated with the home-buying process. Some down payment assistance programs can help you cover these fees.
You may be able to get help from your lender in making your down payment if you have a low income or a less-than-perfect credit score. These programs can be a great option for many first-time buyers.
Using a down payment calculator can effectively determine how much you can afford to pay for your new home and what type of mortgage you can qualify for. You can also learn how to budget for your down payment, which will help you save for your future home.
How much do I need to save?
A down payment is one of the largest financial hurdles that first-time homebuyers often face. But there are a number of ways to help you save money for your down payment.
Ideally, you should save 20 percent of the house’s total value. This will allow you to avoid paying private mortgage insurance (PMI) and will also save you thousands of dollars in interest and mortgage insurance over time.
The amount you’ll need to save for a down payment varies by your lender and personal circumstances. However, the most common down payment amounts are 5 to 10 percent of the purchase price.
If you’re thinking of purchasing a home with a mortgage backed by the Federal Housing Administration, you might qualify for an FHA-insured loan that requires only a 3.5 percent down payment. This is only possible if you have a credit score of at least 500 and have a good employment history.
On the other hand, if you’re looking to purchase a home with an unsecured loan from a bank or other lender, you’ll likely need a larger down payment. Sometimes, a down payment of more than 20 percent may be required.
But regardless of your lender and personal situation, saving at least 10 percent of the house’s value is a good idea. This is a goal that many lenders recommend and can help you avoid the cost of private mortgage insurance and interest over time.
Saving for a down payment can seem overwhelming, but it’s all about persistence and small victories. Start by knowing exactly how much you’ll need to save, and then sock away that amount each month, whether it’s through setting aside that tax refund, making a monthly transfer to an account specifically for down payment savings, or taking advantage of any available savings help your bank offers.
Those small wins can add up to a big down payment in the long run. And if you make it a point to vocalize your year-long plan with family and friends, you’ll have a strong support system to help you stick to it.
How much can I afford?
If you plan to buy a $300k house, it’s important to consider how much you can afford to put down. This will determine your monthly mortgage payment and how much money you’ll have left over after covering all your other expenses.
First, tally up all your income and expenses. This will include your paycheck, alimony or child support payments, investment earnings, rental revenue, and any other sources of income you have. Then, add up your total expenses, including your mortgage, property taxes, insurance, maintenance and utility costs, and any other costs related to home ownership that you may have.
Next, calculate your debt-to-income ratio (DTI). DTI is calculated by dividing your pre-tax income by your minimum monthly debt payments. This is important because it shows lenders how much of your monthly income you can use to make your mortgage and other debt obligations.
Once you have your DTI, use our home affordability calculator to determine how much you can afford to buy a home. You can enter your down payment amount, loan term length, and other financial data to get an estimate of your monthly mortgage payments and your estimated closing costs.
You can then play around with different loan terms and down payment amounts to see how your monthly mortgage payments would change based on your financial situation. Ideally, you want to find a loan amount that leaves you with enough money to cover your expenses and still have some leftovers to set aside for savings or other financial goals.
In addition to your DTI, you should also consider other factors that affect affordability, such as your credit score and the specific mortgage you choose. These factors could include the lender’s guidelines, your own personal circumstances, and other financial goals you have.
The most important rule of thumb is to keep your mortgage payment under 28% of your pre-tax income. This will help limit your financial stress and ensure you have sufficient funds for other major financial goals, such as retirement or college tuition.
Should I buy a home with a low down payment?
If you want to buy a home, you must understand the basics of mortgages and your loan options. This includes the amount you can afford to borrow, your interest rate, your down payment, and whether you need to pay private mortgage insurance or PMI.
A down payment is a percentage of the total purchase price you cover upfront to secure the mortgage. In general, lenders want you to put at least 20% down to get a mortgage. However, you may be able to get a loan with a lower down payment if you have a lot of equity in your current home or are buying new construction.
Having a low down payment will make getting approved for a mortgage more difficult, but it can also increase the chances of you getting better interest rates and loan terms. The only downside is that you’ll need to pay PMI if you put down less than 20%.
Sometimes, you can even qualify for a mortgage with no down payment. For instance, certain veterans and active members of the military can get a 0% down housing loan with no mortgage insurance.
Applying for pre-approval is the best way to determine if you can get a mortgage with no down payment. This process is easy and will give you an idea of how much you can afford to borrow based on your income, debt, and credit history.
Once you have an idea of how much you can afford to pay each month, you can look for homes in your price range. This will help you determine which types of loans are available and if they are right for you.
If you’re looking for a house that costs at least two-and-a-half times your gross monthly salary, you can start shopping for a mortgage by comparing the interest rates and mortgage loan terms offered by different lenders. A mortgage lender will consider all your financial data and come up with a home loan amount that you can afford.